Wednesday, October 31, 2007

Tracking Stock Market Trending and the Market's Technical Strength

I've received a few emails with questions about my measure of Technical Strength. It is simply a quantification of trending behavior over a given lookback period. The measure takes into account, not just the slope of a stock or index, but also the variability around that slope. Thus, a stock that is continuously and smoothly moving higher will have a higher score than one that chops around and ends higher.

I apply this Technical Strength measure to 40 stocks in the S&P 500 Index that are among the most highly weighted issues within the Materials, Industrials, Financials, Energy, Technology, Health Care, Consumer Staples, and Consumer Discretionary sectors. By summing the scores for the individual stocks, I arrive at a single Technical Strength Index for $SPX.

Where I find this helpful is in tracking growing strength and weakness within sectors and from day to day across the broad market.

For example, Monday we had 21 stocks qualify as technically strong, 13 as neutral, and 6 as weak, giving us a Technical Strength Index score of +820. On Tuesday, that changed to 13 issues strong, 16 neutral, and 11 weak (total score of +200). What happened is that some of the strong stocks fell into the neutral category and some of the neutral stocks fell into the weak category.

That tells me that we're in a fluid market situation--many stocks are hovering around neutral. That means they're not trending. Just as I would look to price for breakout of a trading range, I look for large shifts in the Technical Strength picture to gauge longer-term breakouts that might represent nascent market trends.

As far as sector perspectives go, here are Tuesday's scores by sector:

* Materials: +240
* Industrials: -80
* Consumer Discretionary: -140
* Consumer Staples: +220
* Energy: -140
* Health Care: +20
* Financial: -180
* Technology: +260

It looks as though three sectors are holding up the S&P 500 Index. I continue to be surprised by the weak scores among energy stocks despite oil moves to new highs. All in all, this looks to me like less than a robust market: the strength is very mixed and selective.

Note: I've been using the Twitter application to update my various market measures from day to day and to link articles in the financial media that seem informative; watch for the Technical Strength data in those Twitter "tweets".


Measuring Technical Strength (with a link to the 40 stocks I track)

My Last Technical Strength Update